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May 1, 2008updated 13 Apr 2017 8:58am

Regulator takes UK with-profit insurers to task

Regulator takes UK with-profit insurers to task In a letter to chief executives of all insurers that provide with-profits funds, the UK financial services regulator, the Financial Services Authority (FSA), has hammered home the need to treat policyholders fairly

By LII editorial

Regulator takes UK with-profit insurers to task

In a letter to chief executives of all insurers that provide with-profits funds, the UK financial services regulator, the Financial Services Authority (FSA), has hammered home the need to treat policyholders fairly. The letter followed two thematic reviews by the FSA this year which found varying standards of governance of funds.

The first review looked at how insurers provide independent input into their management of with-profits funds to ensure that policy-holder interests are considered. This review, which looked at 40 of the largest with-profits insurers, found a number of issues:

• some insurers’ arrangements for independent input did not involve consideration of wider issues that could affect whether policyholders are treated fairly;

• insurers need to identify and manage any conflicts of interest in the way that the firm uses independent reviewers to look at the firm’s management of with-profits funds; and

• insurers did not always provide timely information to those responsible for the independent review of the management of funds.

The second review looked at 13 with-profits funds that closed to new business before the introduction of the FSA’s rules. It found that the management of some closed funds had not devoted sufficient attention to managing the run-off of the fund.

Commenting, Sarah Wilson, FSA sector leader for insurance, said: “Since the FSA’s introduction of new rules for with-profits funds in 2004/05, we have been monitoring individual firms’ compliance with the rules. The mixed picture shown in the reviews of two key areas is of concern. Some firms are not doing enough to provide independent input into the management of with-profits funds or are not devoting enough attention to running off closed funds.” She added that the FSA will continue to assess insurers on these issues and will take action when customers are not being treated fairly.

Not far enough

Not all interested parties believe the FSA’s letter goes far enough. One of these is the Financial Services Consumer Panel (FSCP), an independent body formed by the FSA to advise on interests and concerns of consumers. Though welcoming the FSA’s letter, the FSCP noted that it “could have gone further”.

In particular, the FSCP said, it believes that the FSA’s interpretation of the rules on independent representation of policyholders interests is not strong enough. There are also other issues that need to be addressed to enable policyholders to have fair access to and understanding of their with-profits funds.

On the issue of independent input into the management of with-profits funds, for example, the FSCP noted that while the FSA requires an independent voice to represent policyholders, such as a with-profits committee, the FSCP’s research showed that 60 percent of these committees use directors of the main board of the company or individuals closely associated with the company, such as non-executive directors and former directors. Although this meets the current requirements, the FSCP believes that this is not independent enough.

The FSCP called on the FSA to take action on the issue of independent input and on a number of other aspects of with-profits funds it believes require review. These include:

• insurers’ ability to use with-profits capital to fund new business development, pay shareholder tax and settle mis-selling claims;

• the availability of advice. The FSCP research found about 8 million people cannot get essential advice about whether they should keep or transfer out of their closed with-profits policies because they cannot afford to pay for fee-based advice, while commission-based advisers are reluctant to take them on for fear of future reprisals from the FSA;

• communications from insurers should include all material facts written clearly so policyholders can understand and act on the information. The FSCP’s research found that communications from with-profits companies often fail to set out options for policyholders clearly; and

• the FSA should consider requiring companies to provide a simplified financial statement that sets out how it has used its with-profits fund over the past year.

“The FSA is making some progress in challenging companies to treat their with-profits policyholders fairly, but there is still some way to go,” said John Howard, chairman of the FSCP. “These are complicated products, and people need help to understand how to make the best investment decisions. If this is not done, consumers will yet again be left with little confidence in this sector of the market.”

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